Individual Tax Form: W-8BEN Instructions In Canada
If you’re a non-American independent contractor, or just anybody who receives US revenue from outside the US, filling out a W-8BEN form is considered a tax requirement.
As a Canadian that starts working for US dollars, you can expect this form to be requested from virtually every client. The W-8BEN form is leveraged by the US government to ensure they receive their foreign tax money, even if it leads to getting taxed on the same income by two different countries.
Note: The standard W-8BEN document assumes you’re operating at a sole ownership income level. Corporations and enterprises need to fill out the alternative document W-8BEN-E.
A SHORT GUIDE TO THE W-8BEN FORM
It’s the payee’s responsibility to complete this form and send it in to the appropriate parties. Even though W-8BEN forms may seem daunting if you’ve never signed one before, at its core the W-8BEN operates on a few very basic principles.
We’ve created this guide to help you learn more about the process to better prepare you for cross-border tax collections.*
*Please note that this information should be treated merely as a starting point; it’s not a legitimate substitute for accurate and detailed legal advice.
What’s The Point Of Filling Out A W-8BEN Form?
The United States government needs this documentation to keep tabs on foreign individual tax payments. However, the form only applies to owners of a US establishment. Put simply, if you don’t have a single part of your company south of the border, you’re exempt from having to complete this form.
From the perspective of the signee, the form lets you declare that you’re not a US resident (so you don’t get taxed as such) and claim CAN-US tax treaty benefits.
Compliance Regarding The W-8BEN
This tax filing is strictly enforced by the IRS – failure of US payers/withholding agents to set aside a portion of non-resident’s income leads to them inevitably paying the tax out of pocket.
In the end it’s still your expense, since you can easily spoil relationships with clients through failing to provide them with a timely W-8BEN form. If you have legitimate claims that your withheld amount was incorrect, you’re eligible to file a US tax return.
Understanding Your United States Tax Relationship
As a rule of thumb, any US company that pays you for your services will reserve a certain amount of your payment for tax purposes. In most cases, these companies are obliged to a withholding rate of 30% that goes straight to the IRS.
Theoretically, the amount withheld is your responsibility to pay in the first place. Assuming you understood this non-resident tax rate before the work contract was signed, you’ll know that taking a 30% pay cut from the IRS is nothing out of the ordinary.
CAN-US TAX CONSIDERATIONS
If you’re a permanent resident of Canada there’s no real need to worry about having your income taxed twice. Even though you must pay Canadian income tax, and a W-8BEN form denotes your compliance to pay US income tax, certain rules prevent you from owing both at once.
The CAN-US tax treaty permits you to effectively dodge being taxed by both countries on one income source, within the same period of time.
By subjecting yourself to US income tax and acknowledging payment withholds, you can deduct that amount when it’s time for Canadian tax collection.
Requirements To Claim The Tax Treaty
Before you can leverage the CAN-US treaty to evade double taxation, you’ll have to show proof of Canadian residency.
Residency can most easily be shown by your primary living property location. In some situations it’s hard to prove using this rule, since a fraction of individuals own various homes in Canada and the US.
If you fall under this multiple home ownership category, residency can be stated based on where you habitually reside or where you have developed the most relationships. Knowing this, it’s still possible that the line between the two nations is blurry – it helps if you’re a Canadian citizen but not a US citizen.
Requirements On The Business Side
As a sole proprietor, it’s possible to have a branch or part of your business located on either sides of the border.
Speaking plainly, your business needs to have a fixed physical location in the United States to be labelled as a US property. A fixed piece of your business is typically where some or all company processes get issued or completed.
Here are some examples:
- Bases of operation/offices
- Facility plants/factories
- Construction/excavation zones
For income tax purposes, your fixed business locations are tax-governed by their respective countries. In other words, if your business is entirely Canadian but you receive US income, you’re still viewed as a Canadian contractor.
It sounds simple enough, but it outlines the basic function of the CAN-US tax treaty. If your base of operations is in Ontario but you have a facility in California, that facility won’t be subject to both Canadian and US income tax at one time.
HOW TO FILL OUT YOUR W-8BEN FORM: A SIMPLE BREAKDOWN
To give you a more specific idea of what this form requires, we’ve broken down each part line-by-line in the table below to help paint a clearer picture:
||Input your legal name (e.g. Jane Doe)
||Input your citizenship nation (e.g. Canada)
||Input your address (e.g. 100 Main St)
||Input your mailing address – leave blank if the same as your address
||Input your US tax identification number (e.g. US social security # or Individual Taxpayer ID #)
||Input your CAN tax identification number (e.g. CAN social security #)
||Input reference number – leave blank in most cases
||Input your date of birth (e.g. 01/01/1960)
||Input your residence country (e.g. Canada)
Once all the relevant data has been filled out look it over a few times and check with an advisor for any missing information. Afterwards, all that’s left to do is sign at the bottom in order to finalize it.
FINAL THOUGHTS ON THE W-8BEN FORM FOR CANADIANS
Due to the CAN-US tax treaty, the W-8BEN form shouldn’t scare you away from pursuing work in the United States as an independent contractor. When your portfolio consists of international clients, it’s hard to completely avoid the tax collector.
If you’re thinking about buying property in the US as a form of residency, check out our guide to purchasing a house in Florida